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CYPRUS / Cyprus International Trusts

Cyprus International Trusts

Cyprus International Trusts (CIT) are set up under the International Trust Laws enacted between 1992 till 2013, regulating the establishment and administration of international trusts in the island.
 
The doctrines of equity, on which trust law is based, have long formed a part of the legal system in Cyprus, inherited from the time of being a British colony. The object of the recent legislation was to modernize and update the existing legal framework.
CITs are exempt from taxation and can be used effectively for tax and other planning considerations.
 
The definition of a CIT and the most important provisions of the International Trusts Law of Cyprus provide attractive opportunities for a wide range of investors as compared to the other common-law international jurisdictions.
 
Nature of trust
 
A trust is established by an individual (the Settlor) and is a means whereby property (the Trust Property) is held by one or more persons (the Trustees) for the benefit of another or others (the Beneficiaries) or for specified purposes. The Settlor can be a Trustee and the Settlor and the Trustees or any of them can be Beneficiaries. A Protector who can be the Settlor may be appointed to oversee the work of the Trustee.
 
In law, the Trustees are the owners of the trust property, although they may not deal with it as absolute owners but rather in accordance with the provisions of the law relating to trusts and the rights of the beneficiaries as set out in the trust documents. In other words, the trustees are under a binding obligation to deal with the trust property in accordance with the law and the directions set out in the trust document.
 
The latest amendments to the International Trust Law adopted in March 2012 have enhanced the efficiency and competitiveness of CITs as an asset management and investment tool.
 
The legislative developments which position Cyprus as a prime jurisdiction in the area of international trusts are mainly the following:
 
Flexible definition
 
The definition of a CIT has become more flexible:
 
  • allows the settlor / beneficiary to become a Cyprus resident as long as neither the settlor nor the beneficiary take up residence during the calendar year preceding the year the trust was set-up the previous restriction on investment in immovable property in Cyprus has been lifted. It is now possible for the trust property to include real estate in Cyprus at least one of the trustees, during the whole duration of the trust, is a permanent resident of Cyprus.
  • A trust can still qualify as a CIT for the purposes of the law even if the settlor, trustee or the beneficiaries are Cypriot companies or partnerships. In fact this provides unique opportunities for a wide range of investors.
 
Additional protection against application of foreign laws or decisions
 
Building on existing clauses, additional firewall provisions were inserted to enhance the validity of the trust vis-à-vis foreign laws and court proceedings in other countries:
 
  • the trust’s validity, management, disposition of property, variations of its terms or the exercise of the functions of the trustee/ protector are regulated by Cyprus’ Law and are not affected by the application of any foreign law
 
  • in the event of the settlor’s bankruptcy, or liquidation, no Cyprus or foreign law shall invalidate the trust and no claim can be brought against the property transferred into the trust. Asset protection in the context of bankruptcy / liquidation applies to the extent that it is proven in Court that the trust was not made with the intention to defraud the creditor. The burden of proof lies with the creditor
 
  • the trust or disposition is not affected by the laws of any other jurisdiction which prohibits or does not recognize the concept of a trust
 
  • the trust or disposition is protected against foreign inheritance law and against foreign laws which regulate personal relationships. They are also protected against judicial or administrative decisions of other jurisdictions which are based on foreign inheritance laws or other laws regulating personal relationships
 
If the beneficiary is a Cyprus resident the income and the profits of the trust earned from sources within and outside Cyprus are subject to the relevant Cyprus tax laws.
 
If the beneficiary is not a Cyprus resident only the income earned and the profit made from sources in Cyprus are subject to Cyprus tax laws.
 
Tax aspects
 
International trusts are governed by the local trust law and are not taxed in Cyprus.
 
If the beneficiary is not a Cyprus resident only the income earned and the profit made from sources in Cyprus are subject to Cyprus tax laws.
 
In fact, CITs enjoy important tax advantages providing significant tax planning opportunities to interested parties. The following tax privileges are indicative of the possible options for tax minimization:
 
  • all income, whether trading or otherwise, of a CIT (ie a trust whose property is located and income is derived from outside Cyprus) is not taxable in Cyprus
 
  • dividends, interest or other income received by a trust from a Cyprus company are also neither taxable nor subject to withholding tax provided that the beneficiaries are not tax residents in Cyprus. Even though a trust with shares in a Cypriot company may not be a CIT, the exemption relies on the fact that Cypriot tax is imposed only on Cyprus residents. As the beneficiaries are not residents of Cyprus, no tax is imposed on the distributions made to the trust
 
  • gains on the disposal of the assets of a CIT are not subject to capital gains tax in Cyprus
 
  • an alien who creates  a CIT in Cyprus and retires in Cyprus is still exempt from tax if all the property settled and the income earned is abroad, even if he is a beneficiary
 
  • a CIT created for estate duty planning purposes would not be subject to estate duty in Cyprus
 
Local trusts ie trusts under which either the settlor or any beneficiary is a Cypriot resident, will still be treated as transparent vehicles for income tax purposes. In the case of Cypriot offshore trusts, provided that no local profit is included, no Cypriot tax will be levied on their income, capital or distribution.

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